Question

True

7) Choose True or False. If False, choose the statement to make it True.
Anvestment that has overperformed over time is more likely to underperform going forward.
False; High returns tend to become even higher over time.
False; A good investment will always outperform other investments.

Answer 1

An investment that has overperformed over time is more likely to underperform in the future due to mean reversion.

Step-by-step explanation:

False. An investment that has overperformed over time is more likely to underperform going forward because the performance of an investment tends to revert to the mean. In other words, investments that have had exceptionally high returns in the past are likely to have lower returns in the future, bringing their performance closer to the average.

This is known as mean reversion. It suggests that investments that have consistently outperformed their peers are more likely to underperform in the future as their returns regress to the mean. This is an important concept to consider when making investment decisions.

For example, let's say a particular stock has historically returned 20% per year, while the average return for all stocks is 10%. Over time, it is likely that the stock's future returns will be lower than 20% and closer to the average return of 10%.

Learn more about Investment performance and mean reversion